How To Understand A Contract Agreement

As a commercial litigation lawyer, most of the cases I deal with are based on breach of contract.

The key issues for the judge to determine are:

a) was there a contract;

b) how should the contract be understood (what was each party required to do);

c) was the contract breached or violated; and

d) what amount of damages should be awarded.

WHAT IS A CONTRACT?

A contract can be verbal, written, or a combination of both. In order for a contract to be valid, there must be consideration and there must be an offer which is accepted.

Consideration means that something of value has to pass between the parties. Ordinarily, one party will pay money for a good or service supplied by the other party. There is no requirement that the consideration provided by each side be of equal value.

The second requirement is that an offer must be made and it must be accepted. For example, when you walk into a store and see a pair of shoes with a $50 price tag, the store is offering to sell you that pair of shoes for $50. By taking the shoes to the counter and handing the cashier $50 you are accepting the store’s offer. The consideration which is exchanged is the pair of shoes provided to you by the store and $50 provided to the store by you. This is a contract, notwithstanding that nothing has been written down, no signatures have been exchanged, and no lawyers have been involved.

HOW ARE CONTRACTS INTERPRETED?

Unfortunately contracts are often written in a way that can be difficult to understand. The words used may be open to different interpretations. One party may allege that an additional verbal agreement was made which changes the terms of the written agreement. Or there may not be any written agreement.

In these situations the Court has to sort out exactly what the parties agreed to. Courts may consider the usual practices in the industry, the way the parties acted after the contract was made, and which competing understanding of the contract makes the most sense from a business point of view.

WAS THE CONTRACT BREACHED?

After having interpreted the contract to decide what actions it required each party to take, the Court then has to decide whether they each fulfilled these responsibilities. If a party failed to do something which he or she was required to do by the contract, the party has breached, or violated, the contract. For example, suppose you own a clothing store and sign a contract to buy clothes from a manufacturer who is responsible for sending a shipment each week. The manufacturer is late with one of its weekly shipments and, as a result, you run short of merchandise and lose sales. In this case, the manufacturer has breached the contract and you can sue for the profits you lost because of these lost sales.

DAMAGES FOR BREACH OF CONTRACT

When judges award damages for breach of contract their goal is to put the innocent party in the position it would have been in if the contract had not been breached. Damages will be awarded for losses suffered as a consequence of the breach if these losses could have been foreseen, or predicted, by the party that breached. For example, if a supplier is late in supplying goods to a retail store, it is a foreseeable consequence of this breach that the store will lose customers to its competitors. The supplier is therefore responsible for these damages. However, the innocent party is also expected to mitigate. This means taking reasonable steps to reduce its losses as much as possible. For example, the retail store might be expected to purchase goods from another supplier to replace goods which its own supplier failed to provide. If it does not do so, the Court may reduce the amount of damages awarded.

Obtaining proper legal advice is important in order to protect your interests both when you are considering agreeing to a contract and when your contract has been breached.

Please feel free to contact us for more information about contract law and your rights.